Could a lack of US initiative block progress in the crypto space?

Volatility continues in all aspects of the market and many believe it will continue through Q4 2022 as the economy moves towards further contraction. But even as stock markets dip in and out of bear market territory, crypto and its close relative, the stablecoin, have taken a monumental beating, with Bitcoin down significantly since the start of the year.

The encryption bill at a glance

A bipartisan bill proposed in June by New York Democrat Kirsten Gillibrand and Wyoming Republican Cynthia Lummis is partly a response to the crypto crash, but also to a growing chorus of institutional market participants calling for more sensible handrails to foster growth. Created by the bill’s authors, “the most comprehensive and comprehensive bipartisan effort to provide certainty and clarity to the growing digital asset and blockchain industry.”

The Responsible Financial Innovation Act (RFIA) seeks to conquer the following:

• Make transactions of less than $200 tax-free – potentially clearing the way for a cryptocurrency that functions more like a currency
• Give new powers to the Commodity Futures Trading Commission (CFTC) and not the Securities Exchange Commission (SEC)
• Set new federal regulatory measures for stablecoins by requiring issuers to maintain 100% reserves and publicly disclose assets backing their token
• The creation of an advisory committee – consisting of members of the private and public sectors

But with the current dysfunction in the US legislative process, major decisions on a “very significant innovation in American money” and its financial system may not happen anytime soon.

Washington dysfunction can block progress and innovation

It’s no secret that the deadlock in Washington is ravaging progress. However, America’s ability to regulate and innovate the future of the world’s digital economy is paramount. Unfortunately, the deeply divided and highly partisan state of the US government is causing the country’s economic leadership to decline, which could have disastrous consequences in the future.

The United States has a long history of leading the world in innovation. We continue in that tradition when it comes to blockchain-based digital securities, banking, payments, insurance, etc. However, management falls short with the regulation and implementation of digital assets such as crypto and Central Bank Digital Currency (CBDC). The lack of action now will affect America’s leadership for decades, along with the innovation and economic benefits inherent in leading a domain.

The world is watching, but not waiting. Instead of following Washington’s lead, other countries are stepping up.

Where countries stand on digital economy regulation and innovation

Japan:

Due to its tradition of collectivism that drives both its corporate culture and approach to regulation, Japan has been an early adopter of cryptocurrency normalization – making it ripe for increased participation and mass adoption of digital assets. The country’s public and private sectors have come together to define a regulatory framework to execute a more digital economy powered by blockchain technology, including the integration of digital assets such as crypto, security tokens and a CBDC.

EU and Switzerland:

The EU is wasting no time in legislating and regulating crypto-assets and marketing service providers. Politicians introduced the “Markets in Crypto Assets (MiCA) framework” which sets clear barriers for crypto issuers, large stable coins and more.

Switzerland has a fairly comprehensive regulatory framework for cryptocurrency and established itself as one of the leaders in this domain, while the UK will introduce legislation on a regulatory system for stablecoins later this year.

As for CBDC, the EU has made significant progress with its “five-year plan” for a digital euro. The European Commission proposed a digital euro bill for 2023 that will support the European Central Bank’s (ECB) test and deploy its own CBDC.

China:

Cryptocurrencies are not considered legal tender in China, but CBDC, the digital yuan, is going all-in. The digital yuan has been aggressively rolled out with more than 260 million already using it, completing more than $13 billion in transactions.

Meanwhile in the US…

Earlier this year, President Biden issued an executive order calling for more research into the development of a national digital currency through the Federal Reserve Bank. While the US had been exploring the creation of a CBDC prior to the executive order, no concrete steps had been taken to move forward. Discussions about a digital dollar continue, but the US is moving slowly with no plan of action – reflecting its stance on the RFIA.

What investors can do in the face of inaction

Given the inability to pass any comprehensive meaningful legislation, regulators are more likely to take the enforcement route against market players. This enforcement route can be directed against any company or market participant that the authorities see as problematic.

All of this means investors need to be aware of risks and do their homework. From tracking regulatory news to having an exit strategy, investors must play an active role regardless of market movements.

No action means the US may have to play by someone else’s rules

Given the recent stablecoin crash, combined with the novelty and prevalence of the crypto asset class, which is currently unregulated here, the US needs to accelerate its legislative process and act quickly to advance a regulatory framework for cryptocurrency.

Will the US dollar lose its position as the preferred international currency due to the country’s inability to move? It is unlikely – especially in the short term. But if the US does not get its act together and take a clear leadership role, other countries will step into the white space (some already have) and define the standards, regulations, technology and systems to be used globally – all based. on their own agenda and perspective.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice regarding your specific situation.